That’s the flipside of the collapse in global oil prices
The contraction in the current account deficit (CAD) in the three months to December, to 1.3% of GDP from 1.7% in Q2FY16, would have been a lot more to cheer about had it not been accompanied by slowing exports and, more worryingly, private transfers. Indeed, there were those expecting a slightly smaller number than the $7.2 billion CAD which resulted from a lower trade deficit of just $34 billion; economists forecast the deficit for FY16 at anywhere between 0.7% of GDP to 1%. To be sure, this is a comfortable position to be in and almost entirely due to the collapse in the price of crude oil. Net FDI more than offset the outflows of portfolio investments and, more important, with net FDI flows of $10.8 billion (much higher than the CAD), India is in a comfortable macro position and relatively insulated from the impact of FII outflows. Fuelled to some extent by investments in e-commerce ventures, gross FDI in Q3 rose to $17 billion from $11.4 billion in Q2.
However, the tapering private transfers—clearly the result of the slowdown in leading Gulf nations following the steep drop in crude oil prices—are cause for concern; at an 18-quarter low in Q3FY16, they amounted to $15.8 billion, down from $16.99 billion in Q2 and $17.13 billion in Q1. With a good chunk of remittances coming in from the Gulf region, these could taper off further in the absence of a meaningful rebound in oil prices. The very slight increase in net software services —to $18.42 billion from $18.2 billion in Q2—is also discomforting since the US economy, which is India’s biggest market for software services, isn’t recovering as fast as was earlier expected. US GDP for Q4CY15 clocked in at just 1%, and is reason enough to temper expectations. India’s IT players may need to compromise on margins to beat the competition and grab market share.
The February trade data did have a couple of bright spots; for instance, both export and import volumes looked up and the contraction was primarily price-driven. Moreover, the pace of contraction in non-oil exports eased to 2.7% y-o-y, compared with an average drop of 12.2% in the past six months. Most important, imports (ex-oil, gold) were higher by 2.3% y-o-y, after six consecutive months of contraction, albeit on a small base. The rise was partly driven by more imports of machinery, tools and transport equipment.